Japan’s real gross domestic product shrank by 1.8% on an annualised basis in the three months through September, the first decline in six quarters, according to a Cabinet Office report on Monday. That was better than economists’ median estimate of a 2.4% fall.
Private residential investment and exports were among key factors exerting a drag on overall output, as expected due to the introduction of regulatory changes for the construction industry and ongoing US tariffs. Consumer spending, the biggest component of GDP, barely budged, failing to counteract the weakness.
The yen was largely unchanged after the release and was trading around 154.55 to the dollar mid-morning in Tokyo.
“Japan’s economy was solid in the first half of this year and today’s GDP showed that momentum is halted temporarily,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities. “I expect Japan’s economy to be back on a moderate recovery trend going forward.”
The data will likely bolster the Takaichi administration’s conviction that aggressive fiscal spending is needed to shore up the economy. The premier is expected to unveil her first economic package as soon as this week, with traders focused on the figure for actual spending as they weigh the risk that rising debt issuance could threaten financial market stability.
Economists are anticipating that the size of the economic steps will slightly exceed last year’s ¥13.9 trillion ($89.9 billion). The package will offer a first glimpse as to how Takaichi aims to balance the largesse of fiscal stimulus with the discipline of fiscal responsibility, as she has vowed to do.
Analysts will be monitoring how Monday’s data might influence Takaichi’s views regarding the Bank of Japan’s policy path. She has already indicated her preference for the BOJ to go slowly with rate hikes by emphasising the importance of monetary policy as part of her pursuit of a strong economy.
The central bank delivers its next policy decision on Dec. 19. Half of BOJ watchers surveyed by Bloomberg last month said they expect a rate hike at that time, while almost all economists predicted a move no later than January.
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